Greetings. Welcome to the Griffon Corporation Annual and Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Brian Harris, Chief Financial Officer of Griffon Corporation. Thank you. You may begin.

Thank you, Hillary. Good morning, everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today. As in the past, our comments will include forward-looking statements about the company's performance based on our views of Griffon's businesses and the environments in which they operate. Such statements are subject to inherent risks and uncertainties that can change as the world changes. Please see the cautionary statements in today's press release and in our various Securities and Exchange Commission filings. Finally, some of today's remarks will adjust for those items that affect comparability between reporting periods. These items are explained in our non-GAAP reconciliations included in our press release. Now I'll turn the call over to Ron.

Thanks, and good morning, everyone. 2021 was a record year for Griffon. We continue to see strong demand in our businesses, driven by a robust housing market and a leading product portfolio in the US and internationally, while effectively navigating a highly dynamic and challenging operating environment. Griffon entered 2021 with significant momentum, reflecting more time spent in and around the house and a renewed appreciation for a lifestyle including the lawn, garden and the outdoors. During the course of the year, we continue to see healthy demand but supply challenges across the global economy emerged and then escalated, creating increasing headwinds for us and the entire global economy, particularly in the second half. Despite these challenges, in 2021, inclusive of Telephonics, we generated record revenue of $2.5 billion, record segment adjusted EBITDA of $317 million and record adjusted earnings of $1.86 per share. Our businesses also continued to see unprecedented levels of backlog, which bodes well for continued momentum into 2022. Our record performance this year is a direct result of our being able to realize the benefits of the strategic actions we've taken to strengthen the company and position ourselves for future growth and increased profitability. Our portfolio repositioning and strategic acquisitions, along with the critical investments we made in infrastructure at our CornellCookson commercial door facility in Mountain Top, Pennsylvania and our ongoing AMES strategic initiative, have put us into a position to capitalize on the consistent strength of the housing market and homeowner activity. Notwithstanding our record levels of performance, we continue to be impacted by an increasingly difficult global operating environment. COVID is better, but it's not over. Particularly in the second half of this year, labor, transportation and supply chain disruptions, both domestically and internationally, have affected our ability to meet market demand and…

Thank you, Ron. I'll start by highlighting our fourth quarter consolidated performance on a continuing basis. Revenue increased by 3% to $570 million. Segment adjusted EBITDA increased 6% to $67 million, with related margin increasing 30 basis points to 11.7%. Gross profit on a GAAP basis for the quarter was $156 million, increasing 1% compared to the prior year quarter. Excluding restructuring related charges, gross profit was $159 million, increasing 3% compared to the prior year quarter with gross margin decreasing 10 basis points to 27.9%. Fourth quarter GAAP selling, general and administrative expenses were $123 million compared to $117 million in the prior year quarter. Excluding restructuring related charges, selling, general and administrative expenses were $120 million or 21% of revenue compared to $116 million or 21% in the prior year quarter with the increased dollars primarily driven by distribution, transportation and incentive costs. Fourth quarter GAAP net income, which includes Telephonics, was $16 million or $0.30 per share compared to the prior year period of $20 million or $0.41 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $21 million or $0.40 per share compared to the prior year of $22 million or $0.44 per share. Keep in mind, the impact of the August 2020 equity offering on adjusted EPS was approximately $0.04. Fourth quarter GAAP income from continuing operations was $13 million or $0.23 per share compared to the prior year period of $21 million or $0.43 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $18 million or $0.33 per share compared to the prior year of $17 million or $0.35 per share. The impact of the August 2020 equity offering on adjusted EPS was approximately $0.03. Corporate and unallocated expenses, excluding…

Just as a final comment on '22, we continue to believe that supply chain disruptions, inflationary trends and labor shortages will remain challenges, but the strength of our demand gives us a high degree of confidence in the outlook. We continue to believe in the strength of our diversified holding company investment and operating centric model. This year marks the third fiscal year since we repositioned our business through divesting the Plastics business and acquiring ClosetMaid and CornellCookson. These actions have fundamentally strengthened Griffon. Over the last three years, our revenue, adjusted EBITDA and adjusted earnings per share, have increased at a compound annual growth rate of 11% and 23% and 35%, respectively. Over this period, we generated $224 million in free cash flow, while cutting our leverage in half to 2.8 times. Our announcement of strategic alternatives for Telephonics marks another fundamental shift in our portfolio. We realize additional value for shareholders and this will allow Griffon to redeploy capital towards accretive acquisitions. Our M&A pipeline is active and we are reviewing exciting opportunities to substantially bolster our existing businesses, as well as considering new opportunities that will further strengthen and diversify us. In closing, I'd like to thank our entire global workforce, which has shown exceptional dedication and perseverance through another challenging year. We appreciate the importance of their work in order to deliver these excellent results. We remain excited about our future. Operator, we're happy to take any questions.

[Operator Instructions] Our first question is from Bob Labick of CJS Securities.

It's actually Lee Jagoda for Bob this morning. So just starting with your guidance and the margin guidance specifically. Are you assuming that the current headwinds and pricing and cost environment is sort of steady state from here till when we recover or are you assuming continued increasing headwinds offset by continued increasing pricing to get to your equilibrium midyear next year?

We clearly see the first half of the year as being more difficult than the second half of the year. The pace of inflationary input costs, supply chain disruptions will hit us worse than the first quarter, better in the second quarter. We'll reach price parity towards the end of the second quarter, and we expect to get back to margins that we were enjoying before the second half of 2021. Brian, do you want to add to that?

I'd just add to that, we expect particular pressure in the first quarter of the year as we're working on the price increases that will start to take hold in the second quarter.

And then just as a follow-up, thinking about your balance sheet and M&A, given the low current leverage and the likelihood that Telephonics process leads to a deleveraging transaction, it appears you'll have plenty of firepower to go out and find acquisitions. Ron, can you comment on any particular areas of focus, potential transaction sizes and whether the multiples out there in the market makes sense to you from a purchase standpoint?

We commented in our last conference call that things had slowed down, and that was really a reflection of what was happening in the Delta variant and what we saw and correctly stepped away. We have been more active this quarter than we've been in the history of the company. We see targets, both big and small, that are complementary to the businesses, particularly around the AMES business and the Clopay business. You're correct that our balance sheet provides significant firepower between our revolver, cash on balance sheet and our proven ability to take leverage up and deploy it effectively, plus the expected outcome of the Telephonics strategic process. We have well over $1 billion of buying power and you should expect that we are actively looking at deploying it into value enhancing, immediately accretive transactions. When we have more to announce, obviously, we will.

Our next question is from Josh Chan of Baird.

I guess on your guidance comments, you mentioned sort of a significant margin impact in Q1. I was just wondering if there's any way to sort of quantify that to limit any kind of future surprises? But then maybe more importantly, do you think you're past the worst of labor and supply chain issues at this point even as you deal with the price/cost dynamic?

So we expect over the course of the year, starting in the second quarter, margins will start to get back to normal and will get more normal in the second half of the year and into the fourth quarter. Our guidance assumes that the supply chain and labor constraints will start to ease in the back half of the year. The first quarter, we're still working on getting the latest set of price increases through. Until they are through, there will be significant pressure on that margin. And starting the second quarter, it will start to that trend back to normal.

It's our view that that's not just us. That's what's happening across the entire economy. And that this wave of input costs, supply chain disruptions, is going to be crashing into people throughout the balance of calendar year '21, which for us is our first fiscal quarter at the end of calendar year companies and a reset progressing into '22. And again, the demand side is certain. And if anything, we think there's potential upside in what we see in trends in the consumer and housing and then throw the infrastructure potential on top of it. Having said that, the inflationary trends that have gone on, you can pass along price immediately, but we have passed along significant double digit price increases and believe that in the second quarter of this year, we'll achieve parity on those existing cost structures, which will drive improved margins for the balance of 2022.

I would just add, actually, in addition, if you look back last year in Q1, we had very good margins. AMES was about 11% and Clopay was 19%. One, to point out the difficult or more difficult comps sort of the prior year Q1 and Q2, to point out the earnings power of our businesses once we get back to normalized state of affairs.

I guess my follow-up, you talked also about some shifts in terms of customer purchases as they diversify and maybe you diversify as well. It seems like there's some meaningful shifts kind of going on. So could you kind of provide more color on that? And where are some of the opportunities and maybe challenges for you relative to these?

So these are mostly applied to our CPP business, our AMES business. And our customers who are, as we said, desperate for inventory, has been looking for other options to fill their shelves. This will have some puts and takes between our customers as all customers are looking for other suppliers. This actually is both an opportunity as a bit of an opportunity for us to focus on our brands and our customers that are strong and will help us protect our margins over the long term. So this is not unusual. We've seen historically shifts between customers and this is just another trend or another ups and down trend of that type of ship.

And ultimately, we believe branded products matter and we'll continue to invest in our brand and deliver the best product at the better or best price point and deliver a value proposition for the consumer.

Our next question is from Julio Romero of Sidoti & Company.

So on the CPP segment, did you see any alleviation to transportation costs or transportation bottlenecks as you progress throughout the quarter, or would you say that maybe the transportation side may be getting worse as you progressed? And then secondly, when might you expect to see some relief on the transportation front?

So we're expecting to see relief really in the second half of fiscal '22. I think that's general not just we'll see it but the overall economy will see it. We saw continued difficult supply chain disruptions, labor disruptions in transportation. Hopefully, they have peaked. We expect them to continue through at least the first half of our year. But as we said, we'll be having price increases that will go out through the first quarter and start to take hold in the second quarter, setting ourselves up for the second half of the year when, again, we expect some of those disruptions to alleviate.

And I guess for my follow-up, I appreciate the commentary in regards to Lee's question earlier about looking at businesses complementary to your current portfolio of AMES and HBP. And assuming your geographic footprint stays the same, I guess, circling back to the other prepared commentary about the dynamic environment creating opportunities. Could you speak at all to the potential for balance sheet deployment to allow you to play offense in regards to your current markets and your around the home strategy?

We are actively engaged in looking to deploy the balance sheet strength that we have and that we will have as a result of the Telephonics strategic process to be complementary, value enhancing and immediately accretive.

Our next question is from Justin Bergner of Gabelli Funds.

My first question relates to the comment about customers looking to diversify suppliers, I guess, in an environment of tight supply. Sort of what are you seeing on the ground, maybe just a little bit more anecdotal that's prompting you to sort of speak to that on today's call? And is that something that is implicit at all in your 2022 guidance or is that more of just something that you're thinking about longer term?

Our guidance absolutely reflects that dynamic. Our customers, as I said before, just to clarify, they are desperate for inventory. We will choose and leverage our brands, our US manufacturing ability, our distribution ability and the highly competitive products that we have to focus on better margin mix, that's the best I can put it.

The goal for us is to have a mix that leads to better margins. And in this desperation of filling shelves, we see opportunities to align our businesses to allow that to happen.

And then my follow-up question was on guidance. First of all, if you could just reiterate the CapEx number. And then the revenue guide for $2.5 billion for continuing ops. Does that sort of assume positive volume and can you sort of quantify what sort of positive volume range is implicit in that guide?

So the CapEx was $65 million, $25 million of which relates to the AMES initiative, just to tick that off. Regarding volume, overall volume -- well, actually on the Home and Building Product side with our large backlog, volume should be positive. We're expecting to be positive and that's what’s baked into our guidance. On the CPP side, particularly with the supply chain constraints, we expect volume to be down over the course of the year but we expect overall to be improving in the second half of the year. However, price overall will be up and therefore, our higher revenue guidance.

Our next question is from Trey Grooms of Stephens.

This is actually Noah Merkousko on for Trey Grooms. So I wanted to talk a little bit about the HBP EBITDA margins and how you're thinking about those long term. I mean those continue to look very impressive, and I think you've been outpacing your longer term guidance there. So just kind of help us frame up what that looks like and maybe what's baked into '22’s guidance for that segment.

I'll remind you, we're the largest residential and now with the integration of CornellCookson and the largest commercial door business, this is our first year that we've broken $1 billion in revenue. And we think the future of the Clopay business is extraordinarily bright, both the repair and remodel market from residential, the commercial and industrial as we continue to rebuild America, the opportunities for us on the commercial side of the business are likely to be even a faster pace of growth than the residential business. The company is in extraordinarily good shape competitively. It is an efficient manufacturer. Our best long term margin days are ahead of us. Short term, same story. Steel prices are up, transportation disruption ongoing, bottleneck issues on component pieces. So the targets for margins for the year continue to be consistent what they were for this year. The pace of how we get there, we expect first half of the year to be lower than the second half. But most importantly, we see volume increasing, unprecedented levels of backlog in the Clopay business and our ability to execute on that gives us visibility on '22. But longer term, to your point, we see the best margin days ahead of us.

And then just on a follow-up. I think you mentioned the infrastructure bill potentially having a positive impact on that HBP business. I'm assuming that's probably not going to be until 2023. but can you kind of frame up how you're thinking about how that might impact demand?

10 years ago, the phrase shovel ready was making the rounds, and we've said for 10 years, we've got the shovels. The impact over the next 10 years from a bill that, when you separate the politics, this is the largest infrastructure bill that's gotten passed in the United States since the Eisenhower administration. We think that we are going to be a beneficiary on both the AMES side of our business. And specifically to your question on the commercial side, CornellCookson is a architectural designer for institutional government facilities. So when you're building bridges and roads and rails and you're improving that underlying municipal state and federal infrastructure, there will be a number of opportunities for us to sell commercial rolling steel door grade security products, all of which comes from a more robust federal spending plan. So we feel exactly that that’s not a '22 conversation, that’s a next five year conversation once it kicks in and it won't kick in until '23.

[Operator Instructions] Our next question is from Sam Darkatsh of Raymond James.

Most of my questions have been asked and answered, just a couple of clarifying housekeeping items. Just so we could get a sense of what possible tax leakage might be on a transaction of Telephonics, since it's a legacy business. Can you remind us what the cost basis is of the business for you?

So we don't expect significant tax leakage. I don't believe we publicly said what the cost basis is but I would just not expect significant amount of tax leakage.

And then the second question, the decision to use not only proceeds but existing liquidity for acquisitions as opposed to share repurchase. Can we infer from that, Ron, that the acquisitions that you're contemplating would be more accretive post synergy than share repo would be?

We still have a $58 million unused authorization. We didn't buy any stock this quarter. We're very busy focused on things that can significantly grow the business, complement our acquisition. So I won't rule out that we won't buy stock in the future.

We have reached the end of the question-and-answer session. And I will now turn the call back over to Ron Kramer for closing remarks.

Thank you all. We had an excellent year and we're hard at work to make '22 everything we think it can be. Our future is very bright. Thanks very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.